Sunday, March 16, 2008

Recession Watch: Bear Stearns catalyst


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I'm just settling down to read the news for the evening, and of course, front and centre is the big bombshell that JP Morgan (NYSE:JPM) is buying out Bear Stearns (NYSE:BSC) for a colossally mind-blowing $2 per share. We're talking about one of America's biggest, and one of the most well-known brokerage house, which was trading at $70 a mere 5 trading sessions ago, being reduced down to 2 George Washington's. I mean, at least Ambac (NYSE:ABK) took a few months before it dropped 93% of its market value.

As fundamentally astounding as this news is, the only thing that matters now is how the markets will respond.

Nikkei225 is down over 3%, and the HangSeng is down over 4% as a result of the Bear Stearns bailout. ES is down over 27pts, NQ is down over 42pts as I type this.

It's clear to me that the market wants to go down. The best case scenario in terms of a tradeable signal would be for SPY to open AND close below 127.5. Achieving that on over 500M shares would just be the whipped cream on top. That would mean that the buyers have all but retreated from the support level created on Jan 21/08 (that was the day Asian markets closed down over 5%). But rarely does it ever work out as expected, and with the PPT out in full force, I do think anything is possible for tomorrow.

The US FOMC meets on Tuesday. If the trendlines in the above inverse ETF's are still holding up well after the US FOMC meeting, I will look to enter positions in one of the above inverse ETF's on any reversals near the trendlines.

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